In August 2003 a special Working Group was set up at the Kazakh Ministry of Industry and Trade with the mission of preparing proposals for selecting investment and innovation projects and coordinating the activities of development institutions. One of the tasks of the new body is to select investment proposals from the regions and direct them to relevant institutions.

Preliminary Selection

From 18 August to 19 September, the specialists in the Working Group evaluated projects proposed by all the regions of Kazakhstan and the cities of Almaty and Astana. Only 173 out of the 220 projects submitted by local governments were approved as meeting all the state requirements. The greatest number of sound investment proposals came from North Kazakhstan, Aktyubinsk and West Kazakhstan Regions. The criteria for preliminary selection were project payback, export orientation, adoption of new technology and international quality standards, high added value, environmental safety and promotion of associated industries.

The Working Group met daily and prepared documents to decide the fate of each project. Twenty-four proposals were sent to the Development Bank of Kazakhstan, 20 to the Investment Fund, 19 to the National Innovation Fund and 14 to the Small Business Development Fund. Seven projects will be considered by the Engineering and Technology Transfer Centre and another 5 by the Market Studies Centre. In addition, 45 projects were passed for joint consideration.

In order to attract large investors, a separate list was made containing 14 proposals to be submitted to trans-national companies. Sixteen commercially promising projects which do not meet some of the criteria set by government development institutions were offered to commercial banks or private investors. Another special list included 16 proposals on products and services for the oil and gas industry.

A list was also made of sound projects requiring government support in the form of finding financing sources, preferential treatment, etc. These 46 projects, for a total of US$922 million, were grouped as follows:

• oil and gas sector;

• rail and road transport;

• industries associated with the oil and gas and railway sectors;

• electrical products;

• new export-orientated production.

It should be mentioned that the above projects were of special interest to the government development institutions.

Project Structure by Sector

Proposals were made for all of the processing sectors and production infrastructure existing in Kazakhstan. The largest numbers of proposed projects were for machinery and instrument manufacture (47), agribusiness (22), chemistry (9) and power (4). In some Regions investment activities are concentrated in certain sectors. For example, North Kazakhstan has come up mostly with machine building projects, Mangistau and Aktyubinsk Regions with chemical industry projects and Kyzylorda Region with agribusiness projects. Proposals from the city of Astana deal mainly with the manufacture of building materials.

One of the most promising proposals is the introduction of new grain processing technology. Alyians Group is planning to build a facility for processing grade 3 and 4 wheat, which is in low demand both within the country and abroad. If implemented, this project will help to solve the problem of starch imports.

Of the 21 building materials proposals, 4 are concerned with sheet glass and 6 with bricks. It is notable that most proposals are related to the import substitution programme, whilst there are only few projects envisaging the introduction of new technology. In this connection, attention should be given to a project proposed by Ekoton+ from Astana which envisages the manufacture of building materials from cellular concrete using the technology from Ytong (Germany).

Initiating Innovation Projects

The Working Group reports a low level of initiative in the field of innovation projects. This fact can be explained by a lack of information about supply and demand for new products and technology. Therefore an efficient system should be set up to exchange this kind of information. In the early stages, before a reliable exchange mechanism is in place, the government should assume the responsibility for operating the system. To date the Working Group has passed a number of innovation projects to the National Innovation Fund, most of them developed by Kazakhstani engineering companies.

Limitations on the Implementation of Investment Projects

The existing state financial institutions face certain financing limitations. For example, the minimum amount of financing is US$5 million at the Development Bank of Kazakhstan and US$200,000 at the Small Business Development Fund. As a result, some of the proposed projects cannot be awarded financing by these institutions even if they meet all the state requirements. The Working Group proposes to study the possibility of making the financing limitations more flexible and involving the Investment Fund more actively in this matter.

In addition, commercial banks should be called upon to solve this issue. The main obstacles that exist to co-financing of projects are the high interest rates and limited loan periods of second-tier banks. In this connection the Working Group proposes to develop a mechanism for compensating commercial banks with a portion of the interest rates on loans granted for innovation projects.

The Outlook for the Future

In accordance with requests by the Working Group, investment and innovation projects are also being submitted by ministries, the national companies and commercial banks.

For example, the national company KazMunaiGaz has submitted 12 investment projects totalling about US$1,502.2 million. Most of them are associated with the exploration and development of oilfields, including those in the Caspian.

The national company Kazakhstan Temir Zholy is planning to implement 6 projects for developing the manufacture of high-tech equipment, modern materials and railway-related services. The aggregate cost of these projects is estimated at US$371.1 million.

The national company Kazatomprom has proposed 7 investment projects for developing the uranium and associated industries. Four of the seven projects total about US$16.15 million.

Kazakhtelecom has submitted 6 investment proposals for building a modern telecommunications infrastructure based on the latest technology from leading international manufacturers and increasing the information transit flow through the country.

Finally, 13 projects for a total of US$341.2 million have been proposed by the Ministry of Transport and Communications.

Research institutions are also expected to submit proposals, mainly of an innovative nature.

The first outcomes of the work by the Working Group and the outlook for its development indicate the need to set up a separate steering committee under the Kazakh Government. The committee should comprise heads of the government bodies that own government blocks of shares in development institutions, and chairmen of the boards and executive bodies of those institutions. The committee will formulate the overall policy for development institutions and co-ordinate their investment activities. As for the Working Group, this could continue to function as a working body of the committee.